CRA considers “salary” paid after employment duties had terminated to be retiring allowance

Regular pay is subject to CPP/EI withholding, whereas retiring allowances are not (see Special payments chart). The most challenging of three situations considered by the Directorate was one where a terminated employee received from her employer: "Compensation 1" paid in lieu of notice for the period from Date 2 to Date 3; "Compensation 2," representing severance pay covering the period from Date 3 to Date 4; and her regular salary from Date 4 to Date 5. The taxpayer purportedly became eligible to again start accumulating years of service under the pension plan when her “salary” resumed.

The Directorate unsurprisingly concluded that Compensation 1 was regular pay, and Compensation 2 was a retiring allowance. Respecting the subsequent “salary” payments, it stated:

In spite of the fact that contributions of the taxpayer to the pension plans continued to accumulate for the period from Date 4 to Date 5, … the taxpayer and the employer did not have an employment relationship during that period…since [citing Schwartz] she was not required to provide services. …

Thus, since… there was no [recommencement] of employment on Date 4… the amounts paid between Date 4 and Date 5 constituted the continued payment of a retiring allowance.

…[W]e do not understand how the taxpayer could resume pension accruals on Date 4 when there was no employment on Date 4.

Neal Armstrong. Summary of 6 June 2016 Internal T.I. 2015-0590411I7 Tr under s. 248(1) – retiring allowance.